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Celadon Group Inc. (NASDAQ:CLDN)

F2Q09 Earnings Call

January 22, 2009 10:00 am ET

Executives

Stephen Russell – Chief Executive Officer

Paul Will – Chief Financial Officer

Chris Hines – President, Chief Operating Officer

Jon Russell – Executive Vice President, Logistics

Analysts

Todd Fowler – Keybanc Capital Markets

Thomas Albrecht – Stephens Inc.

[Donald Bowen] – Avondale Partners

John Larkin – Stifel Nicolaus & Company

Chaz Jones – Morgan, Keegan & Company

Tom Spiro – Spiro Capital Markets

Edward Wolfe – Wolfe Research

Operator

I would now like to turn the presentation over to your host for today's call, Mr. Stephen Russell, Chairman and CEO, please proceed.

Stephen Russell

Thank you, [Chanel], and welcome to the second quarter 2009 fiscal year Earnings teleconference, and I'm joined by Paul Will, our Vice Chairman and CFO, Chris Hines, President and COO, and Jon Russell, Executive VP in charge of non-asset based businesses.

As reported last night, we earned $0.08 a share in the September 2008 quarter. Roughly comparable to the December 2007 quarter, but that's about where the similarity ends.

This year's December quarter experienced the worst and most rapid decline in the U.S. economy in my lifetime. I was born in 1940, so after the last depression. The impact of that decline resulted in a major reduction in demand for truckload services. Certain areas were worse than others.

We experienced a major decline in northbound moves to Mexico, in other words, imports into the United States. This impacted many industries from automotive parts and components to consumer goods. The decline in northbound resulted in our need to reduce southbound in order to not cause major imbalances in our tractor flow.

The decline in our Mexican traffic also upped our deadheaded percentage and that traffic has much lower deadhead associated with it.

Since September, the Mexican peso has declined from roughly $0.098 to $0.072 per U.S. dollar and typically such a change should increase a country's imports, but the severe and rapid collapse of the U.S. economy has prevented that from happening.

Our domestic U.S. freight levels were also down, a range under 10%, but a significant decline. The actual percent was closer to 6% because the last two weeks or so of the month of December we had the effect of the Continental acquisition.

The percent of business we did from brokers also increased from the December '07 quarter. In total, our loaded miles were down about 13% in the quarter, compared with the prior year. Average rate per loaded mile was down marginally from $1.50 to $1.49. Rate per total mile, however, declined more significantly from $1.35 to $1.31, as deadhead increased from 10.3 to 11.9%.

The deadhead increase related largely to the lesser percent of Mexican freight, and generally running further to get the next load.

From a cost standpoint, the actions we've taken over the past 15 months have favorably impacted our results. First, the purchase of more aerodynamic fuel-efficient trucks with bunk heaters, coupled with reducing speeds and fiercely managing unnecessary idling have combined to meaningfully reduce our fuel expense. These changes are permanent in nature and not related to the drop in fuel prices.

The strengthening of the U.S. dollar compared to the Canadian dollar helped earnings by about $.02 a share compared with last year. The Canadian dollar declined from $1.03 in the December '07 quarter to $.82 in the December '08 quarter.

Some months ago we shifted the pay of our Canadian owner operators to a pay level that's tied to the U.S. dollar, so we believe we've taken much of the variability away from that going forward and as we look into the future.

Further, as expressed in U.S. dollars, the cost of our Canadian operation has been materially reduced. Additionally, in June of 2008, we consolidated several functions into Indianapolis from various terminals, which reduced our personnel overhead levels, non-driver employees by about 5%.

In December of '08 we acquired the tractors and trailers of Continental Express of Little Rock, Arkansas. With roughly 400 company trucks and 100 owner operators, Continental was experiencing significant financial issues. Continental's revenue in 2007 was $90 million, which included about $10 million in the inter-modal business, and this acquisition brings us to some degree into the inter-modal business, which we had not done before.

Among the reasons Continental experienced financial difficulty was its miles per gallon. In the month of October 2008, Celadon's miles per gallon were 10% better than Continental's. This difference equated to about 200 gallons per truck per month. With diesel fuel prices at roughly $3 in October, the difference was $600 a truck or on Continental's fleet size it was costing them about $250,000 per month versus us.

With a strong customer base and some excellent operating and sales personnel, we decided that an acquisition of certain assets of Continental would be appropriate. We paid $24 million for the purchase of 400 tractors and 1,100 trailers at a price we determined to be appraised value. We also leased their operating terminal in Little Rock.

Continental had about 130 non-driver employees and about 30 of these employees were hired as Celadon employees. At the same time, we were engaged in a comprehensive efficiency effort at Celadon that reduced approximately 35 non-driver employees across the company.

As a consequence we added a substantial customer base and the Continental terminal in Little Rock without an increase in our consolidated non-driver employee base. We hired about 200 of the Continental drivers and are now selling off the older Continental units and expect to retain about 150 of the tractors we've purchased.

Other developments by the company include the opening of a Janesville, Wisconsin, supply chain facility for Cummins Engine and the growth of our brokerage division of about 70% in the December '08 quarter compared to the prior year; still small but rapidly growing.

In summary on a macro basis we've meaningfully reduced our overall operating costs. Although revenue levels have been significantly hurt by the economic environment, we believe that we are now operating more efficiently than at any time in the company's history.

Looking forward from an industry standpoint, due to the major weakening of the U.S. economy, supply exceeds demand in the truckload industry. Due to the drop in fuel prices, weak fleets have survived longer than I would have expected as lower fuel surcharge has reduced receivables and the need for borrowing.

With the current disparity between supply and demand, it's only a matter of time before supply declines rapidly, and this is the quarter where most fleets have to buy, virtually all fleets have to buy license plates, at which time we believe our overall operating structure will allow us to maximize the upside potential.

Total debt was $81 million at September 30th of 2008, of which bank debt represented $25.5 million. At December of '08, total debt was $84 million, up about $3 million, of which bank debt was $32 million or $7 million higher, despite the $24 million expended for the Continental purchase.

I'd be happy to answer any questions for you now; you can open up the floor. [Chanel]?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Todd Fowler – Keybanc Capital Markets.

Todd Fowler – Keybanc Capital Markets

Hey good morning everybody.

Stephen Russell

Hey Todd Fowler, how are you?

Todd Fowler – Keybanc Capital Markets

Thanks for the clarification there; it's better than some of the things I get. Steve I think we all have a pretty good idea of how things trended throughout the quarter, but can you talk a little bit about what you saw, as far as overall trends sequentially during the quarter, and then a little bit more specifically certainly where you saw or where you were in December coming out of the fiscal second quarter into the fiscal third quarter?

Stephen Russell

October was bad, but it deteriorated in November and December from that level. So far in January it's staying basically at the December level. It had been a little bit of, you couldn't call it brightness, but the last few days seemed to be a tad better, or [putting the word] Todd better, but the reality is it's continued at that kind of level if you look at overall demand.

Todd Fowler – Keybanc Capital Markets

And then I guess thinking about the average miles per tractor for the week being down 13% in the second quarter, where would that have been in December?

Stephen Russell

Probably I don't know, but I'd guess 15 maybe.

Todd Fowler – Keybanc Capital Markets

And is that, okay 15 with Continental?

Stephen Russell

Yes, well they may have kicked up because of Continental so we could work out that number if you want to call us offline. I don't know but I guess 15, maybe, but essentially overall, it got worse after October but after we bought Continental it did pick up the last two weeks of December. The problem is the last two weeks of December had Christmas and Christmas was a different day this year than it was last year. It was Thursday as opposed to Tuesday which are a tad more challenging.

Todd Fowler – Keybanc Capital Markets

Second time we've used tad so far.

Stephen Russell

Yes.

Todd Fowler – Keybanc Capital Markets

And then were you profitable at all in December?

Stephen Russell

We don't announce how we do by month but basically you saw the results of the quarter.

Todd Fowler – Keybanc Capital Markets

With the 90 basis point reduction in average freight per loaded mile, how much of that or how would you break that out between increased use of brokered freight and then what's happening obviously in the overall rate environment and I guess what are you seeing with rates? What are the expectations for contracted rates going forward?

Stephen Russell

What do you mean 90%?

Todd Fowler – Keybanc Capital Markets

The 90 basis point, Steve.

Stephen Russell

Rate per loaded mile was down $0.015 compared with December '07. So, the rate per loaded mile if one backed out the increase in broker freight, by the way, the increase in broker freight went from, we were, brokers represented 5% of our business in '07 December quarter and it was to 7% of our business in '08. So that deteriorated, certainly. The rate per total mile was impacted by the deadhead situation. The deadhead situation was largely related to the Mexico problem even more so than the domestic issue.

Todd Fowler – Keybanc Capital Markets

And on a per mile basis, is domestic end freight higher or lower on average?

Stephen Russell

It's a little bit higher than the domestic freight and Canadian deadhead increased also for the same reason because the northbounds to Canada have been fine but the southbound demand has dropped off for the same reason that Mexican imports have but not to the degree of Mexico.

Todd Fowler – Keybanc Capital Markets

With the head count reduction during the quarter, when did you let the 35 employees go? I guess when was that expense taken out? Was that at the beginning of the quarter or was that towards the end?

Stephen Russell

Thirty-fives was done right after Christmas, was done, January 5. In other words, we wanted to evaluate the Continental people, assess which ones were the ones we wanted to keep. We separately looked at the overall situation of terms of opportunity here in Indianapolis and elsewhere. And the 35 reduction took place January 5.

Todd Fowler – Keybanc Capital Markets

So, there would have been no benefit from that on the SG&A line during the quarter. And then as far as going forward, are you still looking at additional ways to reduce costs on the headcount side or are there other efficiencies that you guys can do considering what the environment is right now?

Stephen Russell

No, we're not. We believe that we're operating very efficiently from a cost standpoint.

Todd Fowler – Keybanc Capital Markets

And then two last ones here, can you talk a little bit about how the customer base looks right now? Basically, where automotive is as a percent of revenue? And then, I always think historically you guys have had a pretty defensive freight profile, tobacco, Proctor & Gamble, Campbell Soup, those sorts of things have that changed at all with acquisitions and also then where automotive sits in the profile as well.

Stephen Russell

Automotive was running in a 6 to 7% range and that was Honda, Volkswagen and some automotive suppliers and, of course, that declined substantially because of, not the loss of any customers, but just the amount of business that they were doing. The overall balance of the customers is similar to what it's been. We have been successful, literally in the last two weeks, with a group of new customers which will start, some as early as next week, some by the end of March.

Chris is actually giving a speech, later today, at a logistics conference in Florida. So, he's on the phone. But Chris, you want to run through some of those?

Chris Hines

Yes, we're starting to see a little of bit of falling. It's certainly not a rushing river but we have picked up two pieces of business, two awards form [Cal Agra], and Honeywell which really kind of both relate to our involvement in the American chemistry Council. On the Mexico northbound side awards from FEMSA, the Coca Cola bottler in Mexico, and PG Mexico, so we picked up a bigger piece of the PG Mexican business than we have.

As well as with Coke and that's a new piece of business for us. We're breaking into Coke for the first time domestically and HP, so their awards had slowed down obviously dramatically in the September time frame, and these are all the awards that have happened in the first twenty days of January.

Stephen Russell

The customer base we picked up from the acquisition of Continental have worked out very well too.

Todd Fowler – Keybanc Capital Markets

And what's driving the recent awards right now within the first part of the year? Is that just people waiting to get through the end of the calendar year and then that's when they were going to turn around and award some freight or is it just more of some dislocation within the market. What's really driving kind of that shift right now?

Stephen Russell

First thing that's very clear is that every major shipper is not only looking at D&Bs but they're assessing the financial strength of the people to award business to and that's been one factor. The other factor is I think we have become – I think that Chris and his people have been probably on every plane every day in terms of pursuing the additional business. So far it looks pretty good.

Todd Fowler – Keybanc Capital Markets

Okay, good, and the last one and I'll let it go. There's been a lot of talk Steve about where inventory levels are sitting right now in the supply chain and a lot of retailers doing de-stocking, do you guys have any sense of how lean inventories are and what's your sense of really when you would see a pickup in volumes given where inventory levels are at?

Stephen Russell

I think that, and I'm going to be able to add nothing more than anybody in Washington is projecting, but I believe that probably and we've talked to a couple of customers about this, certainly by April, but maybe by March there'll be a pickup in demand, and maybe it's the confidence level in the new administration in Washington, but I think that inventory levels are very low and therefore when it does pick up it may pick up quicker than it would have normally.

Todd Fowler – Keybanc Capital Markets

Okay, that's helpful, thanks for the time.

Operator

Your next question comes from Tom Albrecht of Stephens Inc.

Thomas Albrecht – Stephens Inc.

A couple of different questions, in an environment like this where you know there's going to be pressure on rates, how much of your decisions are going to be to do battle with your existing customer base versus trying to enlarge the base as a way to protect yourselves from potentially negative rates that come out of these bid packages.

Stephen Russell

I mean that's why we've been more aggressive in trying to bring on customers such as the ones that Chris mentioned. If you look at the overall rate level, Tom, as you can see from the stats on the back, if you backed out the change in broker freight the rates are pretty flat. And I think that's because major shippers are recognizing what's likely to happen to a significant portion of supply, and they don't want to risk being with the wrong guy.

Thomas Albrecht – Stephens Inc.

Well, and then, so on the subject of Continental Express, I know you've commented on benefitting from some of the customers that you're developing relationships with, as a rule of thumb are those customers generally in the traditional Celadon network or I know they had a bigger presence going out to California, I mean, where are you seeing the benefits of those newer customers?

Stephen Russell

Those newer customers are the same kinds of[lanes, the same length of haul as us, that's why continental worked out so well and will work out so well. We tried to buy Continental about four years ago, because they're very, very similar from the standpoint of length of haul and standpoint of lanes, and bring with it a very good customer base, so…

Thomas Albrecht – Stephens Inc.

Same kinds of lanes but different geography right, or am I reading too much into that?

Stephen Russell

Yes, the only difference in geography is we do business with Pacific Northwest and the Rocky Mountain area, and they didn’t. Other than that, I mean 53% of our business starts or ends in Texas. They're virtually at the same level, very similar lanes.

Thomas Albrecht – Stephens Inc.

And in an environment like the first quarter's going to be, would you have appetite to do another acquisition or between what you have and/or the credit markets would it make sense for you to back off?

Stephen Russell

We don't intend to do another acquisition until later in the year at the earliest, just like we've done in the past. We've done basically one a year.

Operator

Your next question comes from the line of [Donald Bowen] of Avondale Partners.

[Donald Bowen] - Avondale Partners

Quick question, probably more for Paul, you did a $24 million acquisition, do I have this right, your, sequentially your debt fell by what $18 million? Did you get such a big windfall from the fuel surcharge, from a gas [inaudible] perspective, or how did you fund the deal?

Stephen Russell

That's from June, not from September which it was up a couple of million from September.

Paul Will

If you look at our on and off balance sheet debt, our on and off balance sheet debt's up about $10 to $12 million from June to now, that's after the $24 million acquisition, so half the acquisition was paid for with a combination of debt and half was paid for in essence through cash flow from operations.

[Donald Bowen] - Avondale Partners

And, but that debt was, how much of that assumption of debt was on and how much of it was off balance sheet?

Paul Will

We're doing both, buying equipment outright for cash but we're also buying equipment with off balance sheet debt operating leases, so I'm just saying that if you look at the total debt it went up around $12 million, $11 or $12 million from June to now, so I'm saying in that same time period we had cash flow from operations that funded half the acquisition and in essence if you're looking at the top side.

[Donald Bowen] - Avondale Partners

Perfect, understood, well, I will just tell you that it's not a secret that the economy is struggling and that we appreciate you just being candid about how bad things are.

Operator

Your next question comes from the line of John Larkin – Stifel Nicolaus.

John Larkin – Stifel Nicolaus & Company

Actually Stifel is what Archie used to tell Edith to do. It's actually pronounced Stifel, but in any event, thought I'd add a little humor into a rough freight environment, but in any event, the tractor account continued to go up. It was up almost 7%. Is there a point in this freight downturn where you do what many of the other larger truckload carriers have done and that is to kind of shrink the fleet down to roughly current demand levels?

Stephen Russell

Well if you look at the increase that's 7% you're talking about John?

John Larkin – Stifel Nicolaus & Company

Yes.

Stephen Russell

From 2,916 to 3,109, that increase reflects the 405 or 400 tractors that we took from Continental, but if you exclude that, we're actually down about 225, and we expect to be able to sell about 250 of the Continental trucks over the next several months through some agreements that Paul's reached with, and as a consequence it gets weight. You will see that drop in the March quarter significantly.

John Larkin – Stifel Nicolaus & Company

Okay, because I guess I thought the idea was that the Continental business could be layered on top of your existing operations to sort of tighten up utilization, reduce the empty miles a little bit.

Stephen Russell

And that's exactly…

John Larkin – Stifel Nicolaus & Company

Because that is the objective; it just takes a while to dispose of the trucks.

Stephen Russell

Well, the answer is exactly right, that and those trucks will be disposed of because of the 400 company trucks or 100 owner operators we're only going to end up keeping about 200 or 175.

John Larkin – Stifel Nicolaus & Company

Now, has the used tractor market held up consistent with the assumptions you used in pricing the deal in the first place?

[Stephen Russell]

Yes.

John Larkin – Stifel Nicolaus & Company

It has, okay.

Stephen Russell

It’s come down, but that’s consistent with the assumptions we used in there

John Larkin – Stifel Nicolaus & Company

You assumed it was weak to begin with, I’m sure.

Stephen Russell

Yes.

John Larkin – Stifel Nicolaus & Company

And then interestingly Continental has an inter-modal business which you said you were not involved with previously as we know. How has the first month or two of that gone and do you see that being a platform that would inevitably grow that business pretty dramatically and is that going to fall under Jon’s area of management?

Stephen Russell

The people at Continental who managed it you’ve retained. It is continued to do okay and we do intend to grow it.

John Larkin – Stifel Nicolaus & Company

Alongside your truck brokerage business, which is growing as well, is that going to be sort of put, from a corporate design point of view under Jon’s asset light businesses or are you going to keep it sort of more in the trucking organization?

Stephen Russell

Initially we’re leaving it in the trucking organization because the folks that have that background and have done that for several years are based in Little Rock and are part of the trucking operation. Down the road we probably won’t, it will probably be in the non-asset based business.

John Larkin – Stifel Nicolaus & Company

Do they do there own drayage or do they contract that out?

Stephen Russell

They do their own drayage but in very specific localized areas, in other words Chicago, Dallas and Los Angeles.

John Larkin – Stifel Nicolaus & Company

Do they use their own boxes in the form of trailers or containers, or do they…

Stephen Russell

Yes, they use their own trailers and all of the trailers have lift pads which are therefore can be used for TOSC.

John Larkin – Stifel Nicolaus & Company

Thank you for that. You mentioned that fuel probably kept some of the marginal players in the game for a little while longer as we saw fuel drop precipitously during the second half of last year, but also guess that that provided a little of benefit to you because of the lag in the fuel surcharge, number one, and then maybe number two, he spread of between wholesale and retail, is that a fair way to describe it and if so roughly how many cents of benefit did you all benefit from in that regard?

Stephen Russell

The benefit was approximately $0.09 of which $0.05 related to the improved MPG, $0.04 related to the lag, etc.

John Larkin – Stifel Nicolaus & Company

Lag in the wholesales. How much of your fuel do you pump at your own terminals versus buy on the road, roughly?

Stephen Russell

Probably 10% is pumped at our own plant.

John Larkin – Stifel Nicolaus & Company

It’s a relatively small percentage and there was, was there not, a pretty good spread between retail and wholesale during the fourth quarter?

Stephen Russell

You could evaluate that; it varies based on what is being used, etc.

John Larkin – Stifel Nicolaus & Company

Location, etc., okay and then I noticed the insurance and claims number on an absolute basis dropped a little over a million maybe million and a quarter year-over-year. How much of that was accrual rate, how much of that was accidents, incidents or severity? I think you had a pretty good [inaudible].

Stephen Russell

None of it was – if you go back for the last couple of years we average about 3.5 million per quarter. Last year it was actually higher than normal.

John Larkin – Stifel Nicolaus & Company

Okay, so when you adjust for the reduced miles 3.25 is probably about normal then?

Stephen Russell

Exactly right, yes. There’s nothing unusual in that.

John Larkin – Stifel Nicolaus & Company

And then, just lastly I usually try to ask this question of Jon, you’ve been kind enough to help us with this information in the past related to how many of the small companies you do business with in your bulk purchasing business that maybe were with you in the fourth quarter of 2007 that were no longer with you in the fourth quarter of 2008?

Jon Russell

We’ve had a sequentially in the fourth quarter we saw 2% of our fleet become inactive and again, from our standpoint it’s difficult to know if they're going out of business, if they're being acquired, whatnot. We had 2% of our fleets go inactive….

Stephen Russell

That was September to December.

Jon Russell

That was September to December. December to December of our 21,000 fleets; we had roughly about 1,800 go away. It’s been running about 300 to 350 fleets a quarter.

John Larkin – Stifel Nicolaus & Company

Year-over-year that's something like 7% or 8% maybe?

Jon Russell

Yes. That is correct. And we saw significant drop in our fuel volumes because really the way we evaluate the health of our current fleets, even with fuel economy pick-ups, we saw a drop of a little over 20% annually, December '08 versus December '07, in our fuel volumes.

John Larkin – Stifel Nicolaus & Company

So part of that's companies going away but part of it is the remaining companies doing less miles?

Stephen Russell

Less miles and better MPG.

Jon Russell

But it is certainly a struggle at this point.

John Larkin – Stifel Nicolaus & Company

Did you see those numbers accelerate into the negative in December and so far in January?

Jon Russell

We have not seen January. We are on a one month lag because we capture our data end-of-month so we just finished processing December and it is – we thought we were seeing a slowdown in the September quarter and then the fourth quarter calendar year certainly accelerated again in terms of a drop-off. We saw about a little over a 10% drop sequentially on our fuel volumes December to September.

John Larkin – Stifel Nicolaus & Company

Okay. That's extremely helpful color and sort of congratulations on a very good cost-control job in a pretty harsh environment. That really showed through in the numbers.

Stephen Russell

You know, John, in life sometimes you learn more from difficult times than easy times.

John Larkin – Stifel Nicolaus & Company

I've noticed that.

Stephen Russell

And I think we've really, between the fuel MPG and between the reductions in staff that we achieved, the technology that's let us achieve all of that stuff, we're a much better company. And when the world comes back I think we are really well positioned.

Operator

Your next question comes from Chaz Jones – Morgan Keegan.

Chaz Jones - Morgan Keegan

Yes. Hey, good morning. Thank you on Jon's comments on a nice quarter in the environment. Maybe a few housecleaning items here, could you give us some sense maybe for the remainder of the fiscal year how CapEx might trend? I mean actually acquisitions obviously?

Paul Will

Yes, we're, as you said in the past, we're buying equipment through the end of the year. Our net CapEx is going to be somewhere between $35 and $40 million this year. If you look at our trailing 12 month ending December EBITDA last year was $57 million, this year it's about $54 million so we believe that we don't really necessarily need any financing to buy equipment through the end of the year with net CapEx.

Chaz Jones - Morgan Keegan

And that's a net number, Paul?

Paul Will

Yes.

Chaz Jones - Morgan Keegan

And then maybe, quickly, if you have it handy, do you have the operating income number from B2B in the quarter?

Paul Will

310,000.

Stephen Russell

310,000?

Paul Will

It was down from 350,000 from the year prior.

Chaz Jones - Morgan Keegan

Okay.

Stephen Russell

By the way Chaz…

Chaz Jones - Morgan Keegan

Yes?

Stephen Russell

…sorry to other folks listening. Because of what ,Paul, just outlined, we are buying no trucks in 2010. No tractors and no trailers in 2010/, 2011.

Chaz Jones - Morgan Keegan

So CapEx is going to be fairly minimal?

Stephen Russell

Right.

Paul Will

Right. We haven't changed or deviated from the last two years as far as border structure is going to be and by the end of 2010, or 2009, not buying in 2010, 2011.

Chaz Jones - Morgan Keegan

And assuming that the market does recover some by 2010, 2011, would the bias be to pay down debt with free cash?

Paul Will

Yes.

Chaz Jones - Morgan Keegan

Not to beat a dead horse here but just on the Continental acquisition a lot of numbers thrown around, I guess on trucks. Am I to kind of, I guess, take away that you're probably going to, I guess, from Celadon's old fleet count, maybe add somewhere between 150 and 200 trucks related to the Continental acquisition and what you've taken out of Celadon's fleet?

Stephen Russell

Exactly right. And the customer base that they had was consistent with 500 trucks. If one were to back out broker freight and other things you didn't want it really is at least consistent with 400 trucks.

Chaz Jones - Morgan Keegan

And then maybe just to skip back to pricing, it sounded like in the current quarter some of the pricing pressure issue is related to brokerage but I guess as we move closer to, I guess what is traditionally considered the bid season here in the spring, how much push back are you getting at this point from shippers related to base pricing?

Stephen Russell

Our view is that when you get to the sort of the peak bid season which is April, May, it's going to be largely dependent on what the supply demand relationship is at that time. You can draw a scenario that is very optimistic. You can draw a scenario that's very pessimistic. But the reality is at this point I think pricing, customer pricing, is going to be relatively stable as it appears to have been so far.

Chaz Jones - Morgan Keegan

And the last thing, no buy back in the quarter. If you see things are turning, would you certainly step back up and perhaps entertain buying back stock?

Stephen Russell

We have the authority to do it right now. We don't plan to.

Operator

Your first question comes from Tom Spiro – Spiro Capital Management

Tom Spiro - Spiro Capital Management

A couple of financial questions please? As I understand your plans to acquire equipment some significant portion of those acquisitions would be done through operating leases. I was curious whether the availability of operating lease financing has changed in recent months? The terms, residual value guarantees; what' the status of that financing opportunity?

Paul Will

We've heard in the marketplace that it's changed quite a bit, however; based on our financials and what we're doing we have not seen a deterioration in the availability of financing capabilities for leases.

Tom Spiro - Spiro Capital Management

Do you still plan to use operating leases for a significant fraction of your acquisitions in the next couple of quarters?

Paul Will

What we decided to do is position ourselves last year to be in a position at the beginning of this year that based on cash flow from operations and net CapEx from equipment sales we would not have to use outside financing if we didn't want to. So if the terms and conditions on our cash flow financing is not what is acceptable to us we could pay with cash. So the answer is if the rates are right and the terms stay the same we'll probably continue to fund some on operating leases and then just continue to keep our cash to the side, our bank line down.

Tom Spiro - Spiro Capital Management

And as I recall, you have some lease residual value guarantees that come into play when a lease expires. What's been your experience with those guarantees as leases have expired?

Paul Will

We have not had any issues as far as that goes, as far as the residual values and what we get when we dispose of them.

Tom Spiro - Spiro Capital Management

And lastly on the credit line, as I recall, there's an accordion feature to the credit line that allows you to expand from $70 to $90 million. How easy is it for you to access that should you want to? What are the conditions or covenants that you would have to meet in order to gain access to it? And if you did, do the rates on the credit line change? Do the covenants on the credit line change?

Paul Will

The $20 million accordion feature probably this feature, probably in this environment, we probably wouldn't be able to get that $20 million changed in terms of conditions at this point in time would be my guess. But we don't have any intention to ask for that $20 million accordion based on our current cash flow.

I mean we still have over $30 million worth of availability on our line and we believe our line can stay at that level and still continue to execute our business plan of acquiring equipment with our net CapEx requirements.

Operator

Your next question comes from Edward Wolfe – Wolfe Research.

Edward Wolfe - Wolfe Research

Can you talk a little bit about utilization down 16% , what that might have been like in December and how much of this is company specific in the form of either Mexico or the acquisition and how much is just that's where the market is kind of right now?

Stephen Russell

Actual miles were down about 13%, 12.5% or so. The computation of that statistic on the press release is affected in part by the fact that those continental trucks came in at the end of basically December 4th, when the trucks came on the balance sheet, so that the actual decline in miles that the typical drivers felt was closer to 12%.

If you split that, the Mexico business was actually down about 20%. The domestic business was down based on average for the quarter was only 6% but it increased 10 to 12% in December. But the reality is to answer the question, the impact on the typical driver was 13%, 12% not 17%, but the reality is the biggest factor in that by far was Mexico.

Edward Wolfe – Wolfe Research

But it sounded like if I looked at the U.S. market in December it's probably down in the 10%, 12% range that's a fair number for the market level?

That's a fair number. And I think that's basically what we experienced.

Edward Wolfe – Wolfe Research

Now when you look at the ATA [inaudible] done in October and November, down 2% and obviously it was positive for awhile, everyone was scratching their heads, do you think that the reason is is that when truckload carriers think about tonnage they think about the average size of the shipment and they're making an estimate of size of shipment not miles that are going away?

Stephen Russell

No, I think if you talk to Bob Costello, and I did because when I saw what the September or October numbers or the October numbers, I said how could that be correct? And he said, well you know truckload movements were down like 8% or so

In other words truck load versus tonnage is a big difference because the tonnage includes, flatbed haulers; it's concrete haulers, anything relating to the flood and the hurricane in Houston, etc. It's not indicative and I think you should actually probably talk to Bob because he should make that focus by what truckload is or what flatbed is or by what tank truck is. Tank truck may have been up but it's a lot more tonnage than a typical truckload might be 12, 13, a fraction of a tanker.

Edward Wolfe – Wolfe Research

Now, [Simon], if I look at rail volumes they were down 9% in November and about 16% in December. Do you think that the miles we just talked about in November core down utilization to 10% to 12%, now that's probably a feed for demand for truckload may be down 10% to 12% in December and maybe 7% or 8% for the quarter?

Stephen Russell

That’s what I believe and I think that if you ask Bob, or I'll ask Bob and see if he put that out, because I think that's exactly right.

Edward Wolfe – Wolfe Research

When you think about pricing, or revenue per mile anyway net of fuel, going from positive 0.3 to negative 0.9 that's pretty incredible given how quick utilization has fallen. Historically utilization is something that leads pricing down not the other way around. Where was that negative 0.9 in December, and in January where does that feel like it is?

Stephen Russell

Define what you mean by negative 0.9?

Edward Wolfe – Wolfe Research

Revenue per loaded mile net of fuel; for the quarter you reported it was down 0.9%.

Stephen Russell

Right, it was marginally lower in December, but that was mostly broker freight grew between October and December.

Edward Wolfe – Wolfe Research

So, it's down like 1% or 2%, but it hasn’t fallen off like down to 5% or 6% or anything like that at this point?

Stephen Russell

Correct.

Edward Wolfe – Wolfe Research

Is that a possibility in your mind that pricing could be down 5%? I mean it wasn’t long ago that in June, July that we thought that pricing was going to be up 7% or 8%. Could it be down 5% in this unheard of kind of environment we're in, where things have just stopped moving in December and January?

Stephen Russell

It could be. I think frankly had fuel prices stayed higher and you would have, because of the bank situation and the banks unwillingness to lend a 200 tractor fleet money, that the decline in fuel surcharge meant that there was positive cash flow that to a degree for those fleets or the smaller fleets, or whatever. So that had those fleets failed I think 7% or 8% was totally in the cards.

If you look back in the last four years there hasn't been any increases at all. On the other hand it's going to depend on what happens to supply and demand and I think this quarter is going to be very critical to that.

A lot of fleets are cutting back capacity, the number of drivers that we see. Like last week we did and we only hire 40 drivers a week, or so. But we could have hired 200 drivers because of the number of fleets that are cutting back. The issue is if fleets fail you're going to have one result and if fleets don’t fail we're going to have another result. Could it be 5% up or down, absolutely, Ed.

Edward Wolfe – Wolfe Research

I don’t think anybody questions that at some point because of supply that we're going to get some pricing, but historically isn't it true that demand dwarfs supply? When demand is bad and demand can dwarf quick it dwarfs supply and that feels like where we're at right now is that fair?

Stephen Russell

I think that's fair in terms of where we are today. I mean the demand issues, the numbers you quoted for December certainly have had impact.

Edward Wolfe – Wolfe Research

Can we discuss a little bit about fuel impact and the benefit from the lag in surcharge certainly you guys suffered on the way up and you benefit on the way down. How did that impact that year-over-year benefit look in the March quarter relative to the December quarter? Is it half as good? Do you lose it completely? How do you think about that assuming oil levels where we're at right now?

Stephen Russell

As I said earlier, roughly the benefit of fuel was about $0.09 December quarter '08 versus '07. About half of that related to that pick up in the fuel surcharge because of the fall off and the timing issue the other half or $0.05 related to the better MPGs.

The better MPGs is going to stay with us. We fired 140 drivers between March of '08 and December of '08 related to unnecessary idling. Our drivers now don’t idle and if one or two do they now get fired. So that kind of savings stays.

The aerodynamic trucks that we're taking delivery of, that stays; in fact that will get better as we take delivery of more of those trucks, so overall that nickel that's saved, stays. The other is going to be based on what happens to fuel prices. If fuel prices go up we're going to get hurt by the lag, if they stay where they are there will be no impact this quarter.

Edward Wolfe – Wolfe Research

That all seems to make sense. If you don’t go with the fleet in calendar of '10 and '11 and the economy starts to come back and pricing is out there to go get and you can find drivers how do you grow?

Stephen Russell

We looked at what numbers can be, and what they are and it's, I think, pretty focused on costs still focused on margins. I think if one takes some more reasonable assumptions about utilization better reasoning than they are today I think the upside is enormous without even increasing the number of trucks. Our deadhead is 11.9% in the December quarter. In the June quarter of September quarter we were at 9.6%.

Edward Wolfe – Wolfe Research

So is there a hope to improve margins, and cash flows, and returns, and really reap that as opposed to grow the fleet at that period?

Stephen Russell

Correct, between utilization, miles per week per truck, the deadhead, and with our customer base I think the opportunity is terrific and we don’t need to grow the fleet.

Edward Wolfe – Wolfe Research

You talked about selling some trucks and having some deals that Paul's entered into on the tractors. What are you seeing on the used truck pricing relative to say three months, or a year ago?

Paul Will

Used truck pricing is, I would say is down 30% to 40% year over year. It's fallen of in the last three to six months, maybe 10% to 15%. It's really a function of as there is no new trucks being built, as well there's apprehension on buying used equipment and whether or not the individuals buying used equipment can get financing.

It's just no different than freights shutting off in December. Truck purchases have somewhat dropped off. We think we purchased the Continental equipment right, and we believe we are going to move that equipment over the next six months, but there's no question that it's deteriorated dramatically in the last six to nine months.

Edward Wolfe – Wolfe Research

And if you look at CapEx now including the acquisition for all of fiscal '09 what's kind of a good gross in that number?

Paul Will

90 and 35% to 40%.

Edward Wolfe – Wolfe Research

35 to 40% being the net?

Paul Will

Yes.

Edward Wolfe – Wolfe Research

What's your total auto exposure now as a percentage of revenue?

Stephen Russell

If you go back pre the shutdowns at Christmas, it was between 6% and 7% Ed. It was no Ford, GM or Chrysler it was Honda or Volkswagen and then some automotive suppliers, Johnson Controls and folks like that.

Edward Wolfe – Wolfe Research

And Mexico is what percentage of revenue?

Stephen Russell

Mexico, prior to the December quarter was about 35% to 37% of total revenue.

Operator

Ladies and gentlemen that concludes the presentation thank you for the participation, you may now disconnect. Have a great day.

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Source: Celadon Group Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

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